Taxes Next Week, Next Month and Next Year
2021 is coming, dun dun dun….
For some people that is good news, for some people that is like 4 more years of covid.
Here’s some tax buzz to look out for in the coming weeks, months, years.
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Ready to Start Your Business ?
Are you ready to start your business? Make sure you meet with your CPA and Legal Advisors to CYA.
Starting a new business requires a lot of administrative planning and action on top of the already daunting task of working in your business. I like to call this Working On Your Business.
Here is a condensed list of some important things to consider when you are starting your business:
- Finalize and Approve Business Organization Documents (i.e. By-Laws, partnership agreements, shareholder agreements, business plans and projections, etc.)
- Register the business with the State (Corp/LLC/Partnership) and/or County (Sole Prop “FBN”)
- Register with any applicable Licensing Authorities (i.e. Medical board, State Bar, DOT, etc.)
- Obtain Federal EIN from the IRS
- Apply for Business License ( city, etc)
- Setup a system for Tax & Accounting Information, Controls and Procedures
- Open a bank checking account
- Bind insurance coverage needs (i.e. General Liability, E&O, Workers Comp, Health, etc.)
- Setup Human Resources & Payroll
Starting a business is tough. We’re here to help you along the way.
Want to talk more or have questions about your business? Talk with a CPA now 949-877-3143 or email info@mrarrachecpa.com
California Health Department Reopening Guidelines For Restaurants, Retail and Manufacturing
While a lot of business owners are taking a wait-and-see approach, The California Department of Public Health and Department of Industrial Relations recently released industry specific guidance to help employers reopeing their businesses during the Covid-19 pandemic.
These new instructional documents provide businesses with some important information from employee training to customer safety and other tips for a safe workplace. You can view these documents and other employer resources at the California state government’s website https://covid19.ca.gov/
Here are some notable parts from the government guidance if you are planning on curbside service, take-out or dining-in at your local Restaurant or Bar:
- Prioritize outdoor seating and curbside pickup to minimize cross flow of customers in enclosed environments. Restaurants can expand their outdoor seating, and alcohol offerings. Guests are encouraged to order ahead of their arrival, even if dinining-in.
- Limit the number of patrons at a single table to a household unit or patrons who have asked to be seated together. People in the same party seated at the same table do not have to be six feet apart. All members of the party must be present before seating and hosts must bring the entire party to the table at one time.
- Licensed restaurants may sell “to-go” alcoholic beverages, prepared drinks, and pre-mixed cocktails provided they are sold and delivered to customers in conjunction with the sale and delivery of a meal/meals.
- Discontinued tableside food preparation and presentation such as food item selection carts and conveyor belts, guacamole preparation, etc.
If you have questions about this article or want to talk more your business, please contact us at (949) 877-3143 (local) or (800) 425-0570 (toll free) or info@mrarrachecpa.com
Quicklinks to the Documents
News on Good Faith Loans, PPP Audits & Other Questions
Good news for PPP loan recipients(05-14-20)
The Treasury Department has announced the following news regarding the Paycheck Protection Program (PPP):
- A new “current economic uncertainty” safe harbor applies for PPP loans of less than $2 million. These loan recipients will automatically be deemed to have made the required certification concerning the necessity of the loan request in good faith (FAQ #46);
- For loans of $2 million or more, the deadline to return PPP loans to avoid an audit concerning the good faith certification has been extended from May 14, 2020, to May 18, 2020. If a borrower returns the funds by May 18, the Treasury will not pursue administrative enforcement or make referrals to other agencies (FAQ #47);
- The Treasury also won’t pursue administrative enforcement or make referrals to other agencies against a borrower with a loan of $2 million or more who didn’t repay the loan by May 18, if the borrower returns the loan after notification by the SBA that it found on audit that the borrower lacked an adequate basis for required certification concerning the necessity of the loan request (FAQ #47);
- All borrowers who return PPP funds by May 18, 2020, are eligible to claim an Employee Retention Credit (FAQ #45);
- Partnerships and seasonal employers may be eligible for increased loan amounts resulting from changes in the rules as to how their loans were originally calculated. Lenders may automatically request the SBA increase the loan amount for:
- Partnerships that received a loan based on payroll costs that did not include compensation paid to partners in their payroll costs. An interim final rule issued on April 14, 2020, now allows self-employment income of general active partners as allowed under the interim final rule posted on April 14, 2020; and
- Seasonal employers who received a loan based on payroll costs for one of the lookback periods specified in the CARES Act (the 12-week period beginning February 15, 2019, or March 1, 2019, to June 30, 2019) rather than the alternative lookback period adopted by the Treasury Department. Under the alternative rule, seasonal employers may use any consecutive 12-week period between May 1, 2019, and September 15, 2019.
No increased loan amount is available if the lender has already listed the loan on Form SBA 1502 filed with the SBA.
Partnerships and seasonal employers who might be eligible for these increased loan amounts should contact their lenders immediately to ensure they are applying for these increased loan amounts.
The Treasury Department FAQs are available at:
The interim final rule allowing for increased loans for partnerships and seasonal employers is available at:
https://home.treasury.gov/system/files/136/Interim-Final-Rule-on-Loan-Increases.pdf
Feel free to reach out to discuss this article further or if you have other questions for you or your business. (949) 877-3143 (local) or (800)425-0570 (toll-free) email info@mrarrachecpa.com
Covid-19: A Hard Reset For Business
Much like when your computer stalls and “fingers-crossed” you unplug it from the wall and plug it back-in, Covid-19 is forcing the global economy into a hard reset. In this article we will discuss two phases that some if not most business will go through during this pandemic hard reset. Make sure to discuss these ideas with your CPA and financial advisors.
Phase 1 – Survival
One of the most important things to focus on during uncertain times is cash flow both current and projected.
Identify the important cash flow priorities of your business such as employees, customers, landlord, lenders, vendors, shareholders, etc. Keep in mind that the ultimate goal is to return to normal business at some point in the future and it would be useful to maintain these priority relationships.
As you live and breath your cash flow everyday, you may come into a cash flow deficit situation. Before throwing in the towel, make sure you explore alternative solutions for cash flow issues such as:
- SBA Loans (i.e. PPP, EIDL, etc.)
- Payroll Tax Credits
- Deferring Payments for Certain Payroll and Sales Taxes
- Negotiating installment agreements to cover past due payables or taxes
- Equity infusion
If these solutions aren’t working for you and your cash flow is continuing into a deficit, there are other options such as cancellation of debt or closing the business. However, please keep in mind that these options can trigger taxable income, cause serious damage to the credit of the business and its owners and take years to resolve. So, let’s stay in business and Rebuild!
Phase 2 – Rebuild
As the government slowly rolls out phases to re-open the economy it will be like a re-birth for some businesses. It is best to take this time to establish successful cash flow plans. Here is a sample of how to envision your cash flow and create a detailed plan and projection.
- Make Money – Create cash inflow from Net Income, contributed capital, etc (non debt obligations – see next note)
- Pay off Debt – Once the business is making money with positive cash inflow you can build a strong balance sheet by paying off debts. There are scenarios where debts are adequately-leveraged or debt is necessary, etc etc but a simple goal for your balance sheet could be Assets = Equity
- Save Money – Some people advise to save money as you pay off debt, and others suggest to pay of the debt first because debt typically costs more than the earnings from savings….either way, Save Money.
- Invest Money – Once you have paid off your debt and you have adequate savings, then you can invest in your business, such as PP&E, retirement plans, Reasearch & Development, etc.
As you create your various cash flow plans and projections, experiment with different ideas and what-if scenarios to create a range or metric for additional ways to measure future performance.
If you have any questions, please reach out and we can talk more about this and any other questions for you or your business. Info@mrarrachecpa.com or (949) 877-3143 (local) or (800) 425-0570 (toll-free).
Written by: Michael Arrache, CPA, EA (Newport Beach, CA)
SBA Provides Self-Employed and Partners Guidance on PPP Loans
PPP loan calculations for self-employeds and partnerships (04-27-20)
The SBA has finally issued guidelines on calculating monthly payroll costs for Paycheck Protection Program loans for all entities, including self-employed taxpayers and partnerships.
Self-employed individuals
Self-employed individuals with no employees determine their monthly payroll costs by dividing their Schedule C, line 31 net profit amount, up to a $100,000 maximum, by 12. If the line 31 net profit amount is zero, the individual is ineligible for a loan.
If the self-employed individual has employees, add the monthly employee payroll costs to the amount above. These payroll costs are based on the 2019 IRS Form 941 taxable Medicare wages and tips (line 5c, column 1), plus any excluded pre-tax employee contributions for health insurance or other fringe benefits, up to a $100,000 maximum per employee.
To this amount, add the following 2019 costs:
- Employer contributions for employee health insurance (portion of Schedule C, line 14 attributable to health insurance);
- Employer contributions to employee retirement plans (Schedule C, line 19); and
- Employer state and local taxes assessed on employee compensation (UI, ETT, and SDI).
Partnerships
The application for partnerships should be completed at the partnership level. Individual partners may not apply for separate PPP loans.
The maximum loan amount is based on 2.5 times the 2019 monthly self-employment earnings reported to U.S.-based general partners on the 2019 Schedule K-1, Box 14a, net earnings from self-employment tax, with a maximum of $100,000 per partner. If the 2019 K-1s have not yet been completed, they must be completed for purposes of the loan application.
This amount must be reduced by any claimed IRC §179 expense, unreimbursed partnership expenses, and depletion on oil and gas properties. The result is then multiplied by 0.9235 (to remove the “employer” share of self-employment tax).
To this amount, add any 2019:
- Monthly employee payroll costs based on the 2019 IRS Form 941 taxable Medicare wages and tips (line 5c, column 1), plus any excluded pre-tax employee contributions for health insurance or other fringe benefits, up to a $100,000 maximum per employee;
- Employer contributions for employee health insurance (portion of Form 1065, line 19, attributable to health insurance);
- Employer contributions to retirement plans (Form 1065, line 18); and
- Employer state and local taxes assessed on employee compensation (UI, ETT, and SDI).
LLCs
LLCs compute their payroll costs based on whether they are taxed as a sole proprietorship (SMLLC), partnership, or corporation.
Additional guidance
The guidance also specifies how nonprofit organizations and C and S corporations should calculate their maximum loan amounts, as well as the documentation each entity type must provide with its application.
The guidance is available at:
https://home.treasury.gov/system/files/136/How-to-Calculate-Loan-Amounts.pdf
More Recovery Disaster Funds Could be here soon for Businesses
Additional round of funding could be available this week for Businesses impacted by Covid-19.
Among the items being voted on, there appears to be emergency funding for businesses and front line healthcare responding to the pandemic:
- $300B – Payment Protection Program
- $50B – EIDL Economic Injury Disaster Loan
- $25B – Testing
- $75B – Hospitals
Congress and the President are expected to finalize the deal this week and funds should be available shortly thereafter.
Speak with your SBA banking advisor soon to start the application process and make sure to take advantage of planning opportunities for the Payment Protection Program (loan forgiveness) and Economic Injury Disaster Loan ($10k grant). Visit the following links for additional information.
-Michael Arrache, CPA, EA
Partners and Self-Employed – New guidance for PPP Loans
PPP guidance for self-employed borrowers (04-15-20)
The SBA has issued a second set of Interim Final Rules for the Paycheck Protection Program (PPP), this time focusing on how these loans work for self-employed individuals. The guidance clarifies the following issues:
- Individuals who are partners in a partnership (or LLC taxed as a partnership) should include their self-employment income from the partnership in the payroll costs of the partnership (up to $100,000) when applying for loans and calculating loan forgiveness. The partners will not qualify for loans individually based on the self-employment earnings from the partnership. The guidance does not provide any further definition of what should be included in self-employment income for the partners. For example, there is no discussion of guaranteed payments, etc. However, under IRC §707(c) guaranteed payments are subject to self-employment tax unless they are payments to limited partners.
- For Schedule C filers, the guidance is clear that the maximum loan amount (and loan forgiveness) will be based on the taxpayer’s 2019 Schedule C, even if they haven’t filed their 2019 return yet. They will be required to complete a 2019 return to apply for the loan.
- For determining the loan amount, the Schedule C filers will take the net profit from line 31 of the Schedule C (limited to $100,000), divide it by 12, and multiply it by 2.5 for the loan application. If they have employees, they will add the employees’ wages (limited to $100,000 each) and other payroll costs.
- Schedule C filers will also be required to provide a 2020 invoice, bank statement, or book of record to prove they were in business on February 15, 2020.
- Loan forgiveness for Schedule C filers will also be based on their net earnings from 2019 (8/52 of that amount, to reflect eight weeks of earnings), plus amounts paid for employee payroll costs, interest on mortgages (for real and personal property), rent, and utilities. There are no additions for health insurance premiums or retirement contributions of the self-employed individual.
- Self-employed individuals who take credits for sick time or family leave under the Families First Coronavirus Response Act will reduce their loan forgiveness by those amounts.
- Self-employed individuals who receive these loans may not qualify for unemployment.
To view the full text of the interim rules, go to:
Eligible Employers can request an advance of the Employee Retention Credit by submitting Form 7200
IRS UPDATE: The Employee Retention Credit is a refundable tax credit against certain employment taxes equal to 50 percent of the qualified wages an eligible employer pays to employees after March 12, 2020, and before January 1, 2021. Eligible employers can get immediate access to the credit by reducing employment tax deposits they are otherwise required to make. Also, if the employer’s employment tax deposits are not sufficient to cover the credit, the employer may get an advance payment from the IRS.
For each employee, wages (including certain health plan costs) up to $10,000 can be counted to determine the amount of the 50% credit. Because this credit can apply to wages already paid after March 12, 2020, many struggling employers can get access to this credit by reducing upcoming deposits or requesting an advance credit onForm 7200, Advance of Employer Credits Due To COVID-19.
Employers, including tax-exempt organizations, are eligible for the credit if they operate a trade or business during calendar year 2020 and experience either:
- the full or partial suspension of the operation of their trade or business during any calendar quarter because of governmental orders limiting commerce, travel, or group meetings due to COVID-19, or
- a significant decline in gross receipts.
A significant decline in gross receipts begins:
- on the first day of the first calendar quarter of 2020
- for which an employer’s gross receipts are less than 50% of its gross receipts
- for the same calendar quarter in 2019.
The significant decline in gross receipts ends:
- on the first day of the first calendar quarter following the calendar quarter
- in which gross receipts are more than of 80% of its gross receipts
- for the same calendar quarter in 2019.
The credit applies to qualified wages (including certain health plan expenses) paid during this period or any calendar quarter in which operations were suspended.
Qualified wages
The definition of qualified wages depends on how many employees an eligible employer has.
If an employer averaged more than 100 full-time employees during 2019, qualified wages are generally those wages, including certain health care costs, (up to $10,000 per employee) paid to employees that are not providing services because operations were suspended or due to the decline in gross receipts. These employers can only count wages up to the amount that the employee would have been paid for working an equivalent duration during the 30 days immediately preceding the period of economic hardship.
If an employer averaged 100 or fewer full-time employees during 2019, qualified wages are those wages, including health care costs, (up to $10,000 per employee) paid to any employee during the period operations were suspended or the period of the decline in gross receipts, regardless of whether or not its employees are providing services.
Impact of other credit and relief provisions
An eligible employer’s ability to claim the Employee Retention Credit is impacted by other credit and relief provisions as follows:
- If an employer receives a Small Business Interruption Loan under the Paycheck Protection Program, authorized under the CARES Act, then the employer is not eligible for the Employee Retention Credit.
- Wages for this credit do not include wages for which the employer received a tax credit for paid sick and family leave under the Families First Coronavirus Response Act.
- Wages counted for this credit can’t be counted for the credit for paid family and medical leave under section 45S of the Internal Revenue Code.
- Employees are not counted for this credit if the employer is allowed a Work Opportunity Tax Credit under section 51 of the Internal Revenue Code for the employee.
Claiming the credit
In order to claim the new Employee Retention Credit, eligible employers will report their total qualified wages and the related health insurance costs for each quarter on their quarterly employment tax returns, which will be Form 941 for most employers, beginning with the second quarter. The credit is taken against the employer’s share of social security tax but the excess is refundable under normal procedures.
In anticipation of claiming the credit, employers can retain a corresponding amount of the employment taxes that otherwise would have been deposited, including federal income tax withholding, the employees’ share of Social Security and Medicare taxes, and the employer’s share of Social Security and Medicare taxes for all employees, up to the amount of the credit, without penalty, taking into account any reduction for deposits in anticipation of the paid sick and family leave credit provided in the Families First Coronavirus Response Act (PDF).
Eligible employers can also request an advance of the Employee Retention Credit by submitting Form 7200.
Source https://www.irs.gov/coronavirus/employee-retention-credit
California Franchise Tax Board answers important questions related to Recent Federal COVID-19 Response
The FTB has posted the following new FAQs about conformity to various portions of the CARES Act:
Q: Are the payments that individuals receive from the federal government (i.e., $1,200 [$2,400 for individuals filing a joint return] and $500 per qualifying child) under the recently enacted federal CARES Act subject to California income tax?
A: No, these payments are not subject to California income tax.
Q: Is the emergency increase in unemployment compensation benefits (in the amount of $600 per week) that individuals receive under the recently enacted federal CARES Act subject to California income tax?
A: No, these payments are not subject to California income tax.
Q: Are the modifications for net operating losses (NOLs) in the recently enacted federal CARES Act applicable for California income and franchise tax purposes?
A: No, these modifications for NOLs do not apply for California income and franchise tax purposes.
Q: Does California conform to the federal early withdrawal penalty waivers for distributions from qualified retirement accounts under the recently enacted federal CARES Act?
A: Yes, the federal early withdrawal penalty waivers for distributions from qualified retirement accounts under the federal CARES Act also applies for California income tax purposes.
The FTB’s COVID-19 FAQs can be found at:
www.ftb.ca.gov/about-ftb/newsroom/covid-19/help-with-covid-19.html